Rules of Origin: a ‘hidden hard Brexit’ for the UK food industry?

The Food and Drink Federation (“FDF“) has published a report on the potential impact of rules of origin on UK food and drink exporters in the likely event that the UK ceases to be part of the EU customs union after Brexit.

Rules of origin are the detailed content requirements that determine whether goods are produced “locally” in order to benefit from preferential tariff rates. Food manufacturing is an internationalised business, with UK producers regularly sourcing ingredients from across the EU and globally, often because sourcing equivalent ingredients in the UK would not be economically or practically feasible.

To date, the UK has benefited from the absence of origin requirements for trade within the EU. However, after Brexit, while it is expected that the EU and UK will negotiate largely or complete free tariffs on food and drink under a preferential free trade agreement (“FTA“), the ability of UK exporters to benefit from those rates will depend on whether their goods meet the criteria to be classified as UK products. Depending on the outcome, many UK producers who have built supply and distribution models on the basis of the single market framework may find that they no longer comply with the permitted levels of global ingredients and may therefore be ineligible for preferential trade terms and tariffs.

Because the EU and the UK are likely to maintain high basic tariffs for food and drink products, the margin between preferential treatment and non-preferential treatment is likely to be considerable. As a result, FDF argues that producers excluded from preferential terms will face a ‘hidden hard Brexit’ and may face costly restructuring of supply chains, absorption of higher costs or de facto barring from EU-UK trade, potentially requiring a restructuring of operations to avoid cross-border trade altogether.

To reduce this risk, the report sets out eight rules of origins provisions that the UK should seek to include in an EU-UK FTA to ensure any new origin rules are suitable for the globalised industries they will impact. The proposals include:

a de minimis allowance for non-local content in all goods, set at 10% of the value in addition to any other product-specific allowances;

cumulative origin requirements, meaning that goods originating in either the UK or EU are treated as originating in both for the purposes of meeting origin requirements;

origin protocols reflecting the unique value added by high quality manufacturing, established brands and other forms of technological input that often characterise the EU and UK food and drink sectors and contribute to a price premium for these goods; and

a simplification of the administrative burden of complying with origin requirements through wider use of self-certification, extended validity for origin designations and exemptions for low value shipments.

As a major producer and exporter of food and drink both to the EU and globally, failure to secure preferential treatment under an FTA will be costly for the UK and could have knock-on effects across the food and drink sector. Any solution will need to effectively balance the importance of encouraging local production with the reality of global production in order to prevent serious disruption to existing supply and distribution chains.

(c) 2020 Hogan Lovells. All rights reserved. “Hogan Lovells” or the “firm” refers to the international legal practice that comprises Hogan Lovells International LLP, Hogan Lovells US LLP and their affiliated businesses, each of which is a separate legal entity. Attorney advertising. Prior results do not guarantee a similar outcome.